Many business owners believe that if they own the company, they can also freely use the money sitting in the company bank account.
That assumption can create serious tax problems.
In Australia, a company is a separate legal entity. Money in the company bank account belongs to the company, not personally to the director or shareholder. A business owner can receive money from the company in several ways, such as wages, director fees, dividends, reimbursements or properly documented loans. However, if money is taken out without the right treatment, Division 7A may apply.
Division 7A is designed to stop private companies from distributing profits or assets to shareholders, or their associates, in a tax-free or incorrectly taxed way. It can apply to payments, loans, advances, forgiven debts, private use of company assets and some arrangements involving trusts or interposed entities.
Common Division 7A risk scenarios
Common risk areas include:
- A director transfers company money to a personal bank account for living expenses.
- The company pays private mortgage, school fee, car or household costs.
- A company asset is mainly used by the owner or family members for private purposes.
- A shareholder loan sits on the balance sheet for years without a compliant loan agreement.
- The accountant discovers at year end that substantial amounts have been taken out without proper documentation.
If Division 7A applies, the amount may be treated as a deemed dividend to the shareholder or associate. This can create unexpected personal tax, and the deemed dividend is generally unfranked.
How to handle company money correctly
Business owners should treat company funds carefully.
Five practical Division 7A safeguards
Keep company and personal accounts separate. Before taking money from the company, identify what the payment is: salary, dividend, reimbursement or loan. If it is a loan, speak to your accountant early about whether a compliant Division 7A loan agreement is required, including interest and minimum yearly repayment obligations.
It is also important to review director loans, shareholder loans and related-party balances before year end. Transactions involving family members, trusts, related entities or interposed arrangements should not be treated casually.
Many Division 7A problems happen not because the owner intended to avoid tax, but because the company account was used like a personal wallet.
A company structure can be useful for business growth, asset separation and planning. But company money needs to be managed as company money. It is not simply personal cash.
If your company has regular director drawings, private expenses paid by the company, or old shareholder loan balances, it is worth reviewing the position before year end.
